Is Groupon's December Rise Justified or Irrational?

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Sometimes you see people arguing that the markets are rational. But these arguments for the efficient-market hypothesis can't explain the daily moves that can only be chalked up to irrational thinking. Stocks can move dramatically up and down over things that are small or immaterial. These irrational moments can last just hours or go on for months, and sometimes they don't end until after the market makes a correction in response to the past irrationality.

But identifying them can help you become a better investor, for a number of reasons. First and foremost is that when you accept that these types of price moves happen, you'll be better prepared and can avoid falling prey to the irrational behavior yourself. Instead, you'll be able to take advantage of the irrationality by purchasing shares when the market has undervalued them. These buying opportunities are a wonderful way to maximize your investment returns and will help your portfolio grow to its full potential over time.

Let's look at one stock that has displayed some irrational behavior lately.

On Dec. 2, shares of Groupon (NASDAQ: GRPN  ) opened at $8.72. Today, they closed at $10.04. That's a 15.13% increase over the past seven trading days. What's even more shocking is that from the 3rd through the 6th, the stock closed each day at $9.09. Then yesterday, the stock rose 5.83%, followed by a 4.37% jump today.

So why the rise? We know that on Dec. 3, the company reported that its Black Friday sales set a company record. Thanksgiving weekend marked its largest-ever four-day sale period ever, and revenue rose 30% over the same four-day period in 2012. Yesterday, the only real Groupon news was that competitor RetailMeNot had filed to sell a large chunk of shares. That announcement may have sent investors fleeing for Groupon. And finally, today's rise came after analyst Scott Devitt from Morgan Stanley reiterated his overweight rating and $15 price target on the stock.

While Devitt's price target is within a time frame from now till sometime in 2015, what he sees as a catalyst scares me. Groupon co-founder, CEO, and director Eric Leftofsky recently told Devitt he company is focusing on building a better technological infrastructure, including a more user-friendly website design and an easier method for making transactions and using coupons. Groupon is also developing a method to track what links customers click on in their emails. Groupon is one of the world's largest email marketing companies, so capturing this information will provide a massive amount of vital marketing information. Devitt believes this opportunity to further develop its technology will help push the company forward and increase value for shareholders.  

So were any of these stock moves justified and rational? Yes and no.

I believe the move we saw last Tuesday was certainly rational, as the company reported a great sales increase. But yesterday's move wasn't very rational at all, as it can only be based on bad news from a competitor. Today's move is a little trickier. I never like seeing a stock make a significant jump after an analyst weighs in with a rating. Devitt's points on why he feels the company could improve seems rational, as does his time frame. And he's absolutely right about the value of tracking email clicks.

But the problem is that Groupon should have already been doing this years ago. Groupon was supposed to have practically eliminated the act of sending coupons through the mail as online technology took hold. But that hasn't happened, and it probably won't for some time, because the only difference between Groupon and coupon mailings is that Groupon uses email and not snail mail. That's it. We've seen what Facebook and Google can do with advertising based on what individuals search for or tell others about themselves. Groupon had the information it needed to do the same thing, because it knew what deals people were buying, but it didn't take advantage of that information.

It's a no-brainer that Groupon should have been tracking this information. If it wasn't doing something that seems so simple and so important until now, what other opportunities has it missed out on? What other aspect of its business has it failed to think through? That's what concerns me, and that's why I believe Groupon is not a good investment today. Therefore, the share-price jumps over the past few days appears to me to be not justified and, yes, irrational.

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